Benjamin Zycher Of AEI On The Problems Of CAFE Standards

See The Fuel Economy Standards in Beltway Conventional Wisdom. Excerpt:

"That $1,650 net saving is less than half of that asserted by the Obama administration in 2012 (Table III-8), an evolution in bureaucratic arithmetic that should give pause to Bledsoe and anyone else happy to give credence to government projections. In any event, the $1,650 consumer net saving is the newer (January 2017) calculation from the Obama administration, based on an asserted upfront vehicle cost of $875 (Table ES-1) to achieve the higher mileage standard in 2025, combined with asserted savings in fuel costs.

Is that $875 upfront cost number even remotely plausible? A Heritage Foundation study found that the Obama rules have increased prices for new autos by $6,800 over the pre-2009 baseline trend. The National Auto Dealers Association estimate for that increased cost by 2025 is $3,000. Whatever the correct number for 6-, 8-, and 10-speed transmissions and all the rest, those latter estimates are far more consistent with the observed failure of the market voluntarily to move toward a fleet similar to that mandated by the Obama rules.

In the Obama analysis, virtually all of the benefits of the tighter mileage rules accrue in the form of reduced fuel expenses. (Again, the physical characteristics of larger vehicles are assumed to yield no consumer benefits at all.) The future fuel price path assumes that gasoline prices will increase from $2.14 in 2016 to $3.21 in 2025, in year 2017 dollars. That path rises at a rate faster than the market rate of interest (respectively, 4.60 percent and about 3.67 percent), an assumption inconsistent with standard economic analysis. Since changes in gasoline prices are driven almost entirely by the price of crude oil, except in the very short run in the face of unexpected refinery outages and the like, that assumption about the price path implies less oil production now in favor of more several years down the road, so as to take advantage of that higher rate of return to holding oil. Why did the Obama EPA/NHTSA fail to ask whether that was happening? Where were their economists?

The weirdness of the Obama administration analysis is captured by the following passage (page 7):

. . . we believe one of the most meaningful analyses is to look at the payback for consumers who finance their vehicle, as the vast majority of consumers (nearly 86 percent) purchase new vehicles through financing. The average loan period is over 67 months. Consumers who finance their vehicle with a 5-year loan would see payback within the first year. Consumers who pay cash for their vehicle would see payback in the fifth year of ownership.

That argument is nonsensical: “Payback periods” are independent of whether a buyer finances a purchase through a bank or pays cash, that is, “finances” it him- or herself. In any event, the Obama analysis computes the present value of the (assumed) fuel savings at a discount rate of 3 percent (Table ES-5), despite the requirement in OMB Circular A-4 that a 7 percent discount rate be used for benefit/cost analysis. Even if we accept the (utterly implausible) $875 per-vehicle capital cost of attaining the 2025 standard, use of a higher discount rate obviously would reduce the net benefit sharply and might eliminate it entirely.

“Rollback” of Emissions Standards. Analytic silliness is one thing, while borderline dishonesty is quite another, and it is the latter into which Bledsoe descends in his offhand criticism of a purported “rollback of emissions standards.” Bledsoe knows, or ought to know, that a change in the fuel economy standards would have virtually no effect on the emission of such conventional effluents as carbon monoxide and nitrogen oxides because those emission standards are defined in grams per mile, notgrams per gallon. Bledsoe concedes this implicitly: Like Sherlock Holmes’ dog that failed to bark, Bledsoe does not claim that fewer emissions of conventional pollutants are among the benefits of the tighter standards.

Moreover, relaxation of the mileage standards would reduce the per-vehicle cost of achieving them, and so would induce some substitution away from light-duty trucks, for which the per-mile emission standards are less stringent, toward light-duty autos. That same reduction in the prices of vehicles would increase the turnover rate for the national automobile fleet in the aggregate, and because newer vehicles emit fewer pollutants than is the case for older ones, a net reduction in automobile effluents is an almost certain result of a loosening of the CAFE mileage requirements.

Perhaps Bledsoe meant only greenhouse gas (GHG) emissions, although his assertion that “cars . . . would also be dirtier” suggests the opposite, and in that case he should have said so explicitly. In any event, carbon dioxide is not a “pollutant,” but it is true that an increase in fuel consumption would result in an increase in GHG emissions; consumption of a gallon of 10 percent ethanol-gasoline blend emits about 18.9 pounds of carbon dioxide.

Put aside the issue of whether increasing atmospheric GHG concentrations will yield net effectspositive or adverse; proponents of the Obama fuel-economy standards claim that the rules will reduce GHG emissions by 6 billion metric tons. That figure actually is for vehicle model years 2012–25, but never mind. Annual worldwide GHG emissions are about 50–55 billion metric tons; using the EPA climate model, that cut in GHG emissions would yield a temperature reduction in 2100 of around 0.017 of a degree, that is, effectively zero. (The standard deviation of the surface temperature record is about 0.11 of a degree.) How much would that be worth?

Wealth Redistribution Through Regulation. Why is it that the proponents of the fuel-economy standards assume that market forces somehow are incapable of seeing the higher future fuel prices that the bureaucrats predict? Are consumers and producers stupid? Is it really the case that markets are more myopic than politicians driven by the imperatives of the looming election cycle? Merely peruse the history of US government projections for the price of oil to see whether it is the bureaucracy or market futures prices that are to be trusted. More generally: Why should we believe that bureaucrats and politicians are so smart?

The arguments offered in support of the fuel-economy standards are so weak that it is easy to conclude that a deeper political agenda underlies the anger at the Trump administration’s decision to reinstitute the mid-term review. Notice that the regulatory system allows auto manufacturers failing to meet the fleet average requirements to buy credits from others. In 2016, for example, Fiat Chrysler purchased 21.9 million credits, while Honda sold 20.7 million. This system means that purchasers of SUVs and trucks subsidize buyers of small autos and electric cars; that is, urban consumers receive a transfer from rural and suburban drivers. Is it an accident that this transfer subsidizes blue-state constituencies at the expense of red-state ones? Would the left support the fuel-economy standards if the reverse were true?

That subsidy would grow as the fuel-economy requirements tighten. That is all one needs to know to understand why California politicians are vociferous in their demand that the EPA continue to give that state a waiver to impose GHG/mileage rules stricter than the federal ones, so as to force that stricter standard upon the entire nation. This is despite the fact that the fuel economy standards—formally, limits on GHG emissions in the transportation sector—have nothing to do with the ground ozone problem afflicting California, and despite the preemption under the Environmental Policy and Conservation Act of state regulations “related to” fuel economy.

It is far from irrelevant to note that in the contextof the eternal quest by government to expand its power at the expense of individual freedom, the presumption of market rationality is closely analogous to the presumption of innocence for those accused of crimes, not because we believe it to be true in any given case, but because the opposite presumption leads toward a system of totalitarianism. I have not seen an argument for the CAFE constraint on individual freedom in the automobile market that survives even the most minimal scrutiny, and Mr. Bledsoe has failed, utterly, to provide one. That the op-ed editors at the New York Times deemed his silliness fit to print is a measure of the depths to which modern journalism has sunk."

See also Taxes Show One Way to Save Fuel by Eduardo Porter in The NY Times in 2012. Excerpt:

"According to economists crunching the numbers, this makes mileage standards somewhere between 2.4 and 13 times more expensive than a gasoline tax as a tool to reduce our use of fuel. Indeed, by some calculations, raising fuel-economy standards is more costly than climate change itself.

The government has to predict how much climate change will cost us in the future — through lost agricultural productivity, poorer health, bigger hurricanes and the like — to figure out how much we should spend today. It does so through a measure called the “social cost of carbon,” which captures the added damage that will be caused by adding one more ton of CO2 into the air.

The government’s estimate of the cost to our society covers a wide range of $5 to $68 a ton and increases over time. Several economists have concluded that cutting carbon emissions via fuel-efficiency standards may be even more expensive. Adding in benefits not related to global warming — like less pollution, less reliance on foreign oil, and less time spent filling up — the mileage standards may still cost more than their benefits."